UK - The Pensions Regulator today warned pension scheme trustees they must scrutinise more closely employer covenant changes in cases of corporate transactions such as buyouts.

"We are going to update our clearance guidance, which relates to the clearance process where companies are considering a corporate transaction, a change of ownership for instance," a spokeswoman told IPE.

The regulator is urging trustees to look carefully at changes to the employer's ability to fund the pension scheme: "Where there are highly leveraged bids, trustees should look closely at how the pension scheme is going to be affected," the spokeswoman added.

The organisation intends to reinforce the guidance for trustees in the case of abandonment of a defined benefit (DB) pension scheme and is reminding trustees of their duty to protect their scheme's assets, the spokeswoman said.

"It has been a record period for merger and acquisition activity and there have been a number of highly leveraged deals, so we just wanted to clarify our approach in light of those," she concluded.

John Broome Saunders, Actuarial Director at BDO Stoy Hayward Investment Management, called the move a significant toughening of the regulator's position.

"It effectively means that defined benefit pension issues need to be considered, irrespective of whether the scheme appears to be in deficit or not," he said.

Broome argued, to date, the threat of regulatory intervention has resulted in significant additional contributions to DB schemes in order to clear the way for leveraged deals, usually backed by private equity.
He added: "Today's announcement is clearly designed to increase the size of those lump sum contributions."

This development comes as the Alliance Boots' prospective new owners KKR and Stefano Pessina remain locked in talks with the  company's pension trustees, following the board's recommendation of their £11.1bn takeover bid.

Today, the scheme announced it had not yet reached an agreement, but said discussions would continue.

"The potential level of debt envisaged for AB Acquisitions Limited would, in the view of the Trustees, have serious implications for the position of the Scheme," John Watson the fund's chairman, wrote in a letter to scheme members today.

However, the Pension Regulator's office declined to comment on the transaction.